On the House: U.S. approach to easing foreclosures a disappointment

By Al Heavens, Inquirer Columnist

I'm not sure why an academic would be reading my column online at 3 a.m. on a Sunday, but that was the time stamped on Tomasz Piskorski's Sept. 9 e-mail.

Piskorski is the Edward S. Gordon Associate Professor of Real Estate at Columbia Business School, so housing concerns must keep him up at night, too.

The column dealt with the hit-or-miss - mostly miss - quality of the Home Affordable Modification Program (HAMP), the Obama administration's disappointing approach to reducing foreclosures.

Piskorski and several colleagues have conducted lengthy research on why that is, the results of which I'll share with you in a moment.

But first, so you don't think I'm picking on President Obama: Jed Kolko, chief economist for Trulia, the real estate search engine, said recently that while the housing market is in better shape than it was four years ago, "it's mostly not to the president's credit."

Policy did little to affect the trends in prices and construction, and the administration's most visible housing push - refinancing - was more about economic stimulus than about keeping people in their homes, Kolko said.

"Furthermore, the foreclosure inventory remains high in judicial states, mortgage credit remains very tight, and big future housing-policy questions are unresolved," Kolko said, and "normal remains many years away."

That's what Piskorski and his colleagues found after analyzing data from the Treasury Department that included information on performance and modification rates for 30 million loans.

"We estimate that permanent renegotiations by HAMP will reach just about one-third of its targeted three million to four million indebted households while adversely affecting the effectiveness of modifications performed outside of the program," he said.

Overall, Piskorski said, HAMP has resulted in only modest reduction in foreclosures and did not alter the rate of house-price decline, consumption of durable goods, or employment in regions with higher exposure to the program.

A few large mortgage servicers didn't appear interested in renegotiating terms of the loans that qualified under HAMP, the research showed.

It has long been assumed that the reason behind this was the incentives the government paid for successful modifications.

Basically, if a servicer successfully modified a mortgage, it would receive $1,000. It was assumed that a large volume of modifications would make it worthwhile.

The fact that the program was voluntary was one reason many critics believed it would not be successful. Another reason was data showing that fewer borrowers were likely to fall into default again if the loan principal were lowered - an idea rejected again in recent weeks by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac and the millions of mortgages they guarantee.

The research conducted by Piskorski and his colleagues showed, however, that the low renegotiation activity was really the result of "preexisting organizational activity."

"The fact that some other servicers, with similar loans, actively conducted modifications under the program suggests that the incentive structure of the program may not have been inadequate per se," he said.

"Rather, the program failed to account for limited organizational capability of some servicers," Piskorski said.

Here's an example, from June 2011, when the Treasury Department's review of servicer performance found three of them lacking:

The performance review found the three servicers had miscalculated mortgage borrowers' income in many cases, resulting in denial of permanent modification or even participation in the program.